Up and Down Wall Street

Shareholders Be Damned!

How the Washington gang brought Ken Lewis to heel and forced Bank of America to go through with its acquisition of loss-ridden Merrill Lynch. If everything's coming up roses, why are corporate insiders selling?

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IT WAS JUST LIKE ONE OF THOSE NOIR FLICKS crafted from a Raymond Chandler novel. Imagine the opening scene. The time is last December. It's a cold night with the wind howling. The camera zooms in on a dimly lit room in the center of which sits a bespectacled banker sweating bullets, his body limp in a ratty chair, surrounded by a bunch of nasty-looking hombres wearing double-breasted suits, sinister fedoras and stone expressions.

One of the gang, obviously a capo, leans menacingly toward the banker and snarls, "Do what we tell you to do or you've had it!" The banker knows he's in the tightest spot he has ever been in his 62 otherwise wonderful years on this blessed earth. (Worse by far than the time he had to collar that killer disguised as a little old lady threatening to blow the bank up with a stick of dynamite "she" had sequestered in "her" bloomers.)

If he agrees to do what they want, he risks losing his good name and with it the irreplaceable precious fruits of a lifetime of earnest labor. If he doesn't...

The toughs grow impatient. Shaking with fear, the banker rises from the chair to face his remorseless tormentors. From the hidden depths of his being he somehow summons up the courage to declare in a suddenly strong and unwavering voice: "I'll take it up with my board."

OK, so this audacious show of verbal defiance may not quite reach the level of "Give me liberty or give me death." But we live in a less eloquent age than did Patrick Henry and, remember, our hero is a banker, not a fiery patriot. And it takes a very brave man to tell his board anything more substantive than what's on the menu for lunch.

Moreover, this was no celluloid chiller. It was the real thing. The banker, as you may have guessed, is Ken Lewis, CEO of
Bank of America.
bac 0.7803921568627451%Bank of America Corp.U.S.: NYSEUSD23.1291
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And the bad guys harassing him are Hank Paulson, then Treasury secretary, and Ben Bernanke, head of the Federal Reserve, aided and abetted by shadowy henchmen.

The script for this stranger-than-fiction melodrama was provided by that rabid (and fiercely ambitious) bulldog New York state attorney general, Andrew Cuomo. Mr. Cuomo, back in February, had been grilling Mr. Lewis on what his keen canine eye detected as another indignity -- the awarding of $3.6 billion to employees of Merrill Lynch, the giant brokerage firm acquired by BofA on Jan. 1 of this year.

What had Mr. Cuomo frothing at the mouth was that the $3.6 billion was shelled out even though Merrill suffered losses upwards of $15 billion in 2008's fourth quarter alone.

We must point out how fortuitous it was that losses had not reached, say, $30 billion, since by the peculiar calculus being used to reward red-ink, that would have boosted Merrill's bonus tab to $7.2 billion. And enraging the chronically enraged Mr. Cuomo all the more was that the bonuses were distributed even while the losses manifested themselves but were not disclosed, least of all to the bank's shareholders.

According to Mr. Cuomo's dour narrative, the product of four hours of interrogation of Mr. Lewis, the merger with Merrill was proposed in September after two days of due diligence (sounds more like due negligence to us). It gained approval of shareholders of both companies on Dec. 5. Barely a week later comes the revelation: Merrill's losses were spiraling ever higher, causing an increasingly frantic Mr. Lewis to weigh calling the marriage off.

He reckoned he could legally do so thanks to MAC (material adverse event), recognizing that $7 billion more in losses than had been projected when the merger was agreed to was a very big MAC, indeed. He diffidently informed the powers-that-were of his plan to nix the nuptials and was summarily summoned to powwow with them in Washington that very evening. And it was there that Messrs. Bernanke and Paulson put the screws to him to not break the deal lest he trigger a systemic calamity.

On Dec. 21, Mr. Lewis, still of a mind to ditch the merger, communicated his determination to Mr. Paulson, who bluntly warned that he would give the boot to Mr. Lewis and his board unless the acquisition went through. To that bald threat, Mr. Lewis' retort was a resounding purr: "That makes it simple. Let's de-escalate."

And de-escalate he did. The merger became a done deal right on schedule. To help salve any hurt feelings, Bank of America got $118 billon in loan guarantees from rich Uncle Sam to absorb any potential losses from Merrill.

We don't mean to beat up on Mr. Lewis. We haven't the faintest doubt his refusal to stand tall was not prompted by fear of being fired. Heavens to Betsy, no. Rather, it likely sprang from too much heart: a deep-seated solicitude for his shareholders and a touching desire to shield them from the awful truth about the Merrill acquisition. Sure, they're the putative owners of the company, but best not to upset them over something they'd inevitably learn about in due course when those losses started to eat up the bank's bottom line.

As to Mr. Paulson and Mr. Bernanke, we're sure they, too, are decent souls and value truth, except when it's inconvenient. Despite vows of transparency and all that blah, they were more than complicit in a rather shabby cover-up; they conceived it, pursued it and made certain through means fair and foul it was carried out.

Why, then, should anyone worry about the results of the bank stress tests slated to be released early next month and have inspired so much anticipatory dread on Wall Street? As one wise cynic asks, given its demonstrated devotion to the banks and the financial markets, do you really think that the Washington gang is going to throw anybody of significance under the bus?

SINCE WE ENDED THE LAST ITEM with a question (two, to be precise), we feel, just in the interest of interconnectivity, we should begin this one with a question: How come, if the stock market is telling us everything is coming up roses -- the Dow has shot up 23% since March 9, the S&P 500 28% and dear old Nasdaq 34% -- corporate insiders are selling like there's no tomorrow?

Much as anything, we suspect, what has given legs to this rather improbable but undeniably impressive rally is the rally itself. Let us assure you that we haven't gone mystical (we've enough sins to atone for without adding still another).

Let's put it this way: As a stimulus for equities, come rain or come shine, just about nothing beats higher prices. They entice risk-shy investors, including or especially (hard to decide) those who have been mauled by the bear market, to edge off the sidelines and get their feet wet.

Higher stock prices (as Ken Lewis might say) escalate expectations and earnings estimates of analysts, most of whom are, in any case, reflexively bullish. They give the yak-yaks on Tout TV something to crow over and excite their innocent viewers.

In other words, they serve to inject a dose of euphoria into the investment atmosphere, particularly after a long and morose stretch of gloomy markets, like last year's.

Of course, rising equity prices also inspire less chimerical reasons for the quickened interest in the stock market. They are widely taken by institutions, individuals and kibitzers as a welcome harbinger of economic recovery, and there's been a lot of that lately. Our own feeling, as you may have gleaned, is that such hopes are heavily laced with wishful thinking.

Leading us to the question with which we began these musings: If those now infamous shoots of recovery are popping up all over, why would insiders be so aggressively dumping stocks?

Yet, they indisputably are. According to a study prepared for Bloomberg by Washington Service, a research outfit, directors, officers and the like have sold $353 million worth of stock in this fading month, or 8.3 times the total bought. As a matter of fact, according to the firm, insider purchases of $42.5 million are on track to make April the skimpiest month for such buying since July 1992.

The pace of selling in the first three weeks of this month, incidentally, was the swiftest since the market peaked and the bear came out of hibernation with a vengeance in October '07.

We're quite aware that insiders are not infallible. But they are, after all, in the front lines of commerce and industry and so presumably have a better fix on the economy and the prospects for recovery than analysts and economists, whether of macro or micro persuasion.

And just as they wouldn't be laying off people in such extraordinary numbers if they thought their business was about to rebound soon, they'd be loath to liquidate their holdings in such an emphatic way if they espied a turnaround in the offing.

It all boils down to this: Nobody ever sold a stock because they thought it would go up. And as a group, corporate insiders obviously are scarcely enthusiastic about the prospects for a genuine bull market.